SMS in due diligence on two purchases

Australian IT services company SMS Management & Technology today said it was in due diligence with two potential acquisition targets as it looked to continue to bolt on other companies to its already growing base.

Australian IT services company SMS Management & Technology today said it was in due diligence with two potential acquisition targets as it looked to continue to bolt on other companies to its already growing base.

"In each case, they're specialists in an area which expands our capabilities and market footprint," said the company's chief executive Tom Stianos in an interview this morning after the group's annual financial results disclosure.

If the acquisitions do proceed, they will do even more to cement SMS's growing reputation as a serial acquirer in the enterprise IT services space in Australia. Earlier this year, the company picked up Oracle consultancy Bright Blue Solutions, for example, and last year it bought two other companies, Aipex (which provides services around the TIBCO technology line) and Pelion (which focuses on data management).

Stianos said SMS still had a good cash reserve for future acquisitions.

Rival IT services group UXC had put itself on the market, but Stianos would not be drawn on whether SMS had taken a look at the company specifically. "We've looked at all the big players," he said. "But we've found that it's more value-accretive for us to acquire a small capability, a specialist in an area, and use that to acquire organic growth."

There was no win for shareholders in "doubling numbers without doubling profit", Stianos said.

Australia's IT services market is currently characterised by a plethora of mid-sized players like SMS, Oakton, CSG, DWS, UXC and ASG, which are increasingly putting the pressure on bigger multinationals like IBM, HP, CSC and Fujitsu.

Stianos said there were some arguments that consolidation should proceed in the sector, but he would never let "ego" drive strategic decisions for SMS. "We'll do what's right for the company and for shareholders," he said.

The results

The second half of the 2010 financial year was a better period for SMS than the first half. The company today revealed that for the year ended 30 June, it had increased revenue by 7 per cent, reaching $247.6 million, with earnings before interest, taxes, depreciation and amortisation (EBITDA) up 15 per cent to $38.1 million and net profit after tax up 15 per cent to $27.9 million.

But Stianos said most of the revenue growth came from the second half of the year, with revenue for that half up 19 per cent on the previous corresponding period, compared with only a 7 per cent rise for the first half.

SMS's staff numbers have jumped upwards since June 2009 as well, with the company taking on an additional 204 staff in the period, mostly in the second half, including 162 permanent consultants and 32 contractors.

The IT services company went through a staff chop in late 2008 as the global financial crisis hit SMS hard. However, Stianos said he thought the up-and-down roller-coaster of staff numbers had not affected the company's culture.

"I think our culture's quite vigorous and strong," he said. "If you're adding 20 per cent, that means that 80 per cent of the people are already there and well inducted." He added that he thought it was the behaviour and values of the leadership team that made a company what it was.

In terms of future growth, the executive said he was seeing demand from most sectors, and that some would open up further shortly; for example, with the resolution of the government business "hiatus" created by the Federal Election.

And the SMS chief said that while there was still a debate about the potential benefits to be gained from the National Broadband Network project, which the Coalition will cancel if it wins office, he was a believer. "People underestimate the innovation from the digital economy. Really, it's going to spur off a whole new wave of applications," he said, noting he was confident other CEOs of technology companies had a similar view.

"SMS is not going to be involved in rolling out the cables," he said. "We're not about the tracks, but we are about the locomotives."